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You're Making Things Worse, Best Buy

The consumer electronics retailer strikes back and misses.

Hoping to combat the viral popularity of Forbes contributor Larry Downes' scorching "Why Best Buy is Going out of Business...Gradually" article, Dunn decided to use the struggling retailer's corporate blog to defend his company on Friday afternoon.

Downes had gone for the jugular in ripping into the consumer electronics behemoth, as many of us have lately after catching the scent of Best Buy as a wounded animal. He singled out the company's cascading margins, aggressive up-selling tactics of its employees, and archaic return policies. Downes obviously ate into Best Buy's inefficiencies relative to Amazon.com(Nasdaq: AMZN) and the cost efficiencies of smaller dedicated e-tailers. There's a reason why even BestBuy.com isn't growing half as quickly as Amazon, folks.

Dunn saw it, didn't like it, and decided rallying the troops was in order.

However, it's at that point where Dunn decides to sing the praises of Best Buy and its 180,000 employees.

Big mistake.

Dunn and dumberHoping to back up his cheerleading with data, Dunn points to a recent NPD Group study where the market research provider points out that nearly 80% of consumer electronics purchases still go through physical stores. He also offers up that 40% of the orders through the BestBuy.com website are placed for in-store pickup.

The problem with snapshots is that they don't tell us where we are or where we're going. Was it more than 80% five years ago? Will it be less than 80% five years from now? We know the answers.

Here are some nuggets from a different NPD Group report that came out last year.

81% of consumers either shop or research for consumer electronics online.

Online-only retailers are more effective than retailer websites in converting traffic into sales.

Lower prices are why 83% of in-store shoppers ultimately walk away and buy online instead, and 19% of them are already whipping out smartphones to do comparison shopping.

Dunn points out how Best Buy generated more than $2.6 billion in cash flows from operating activities during the first three quarters of the fiscal year. He also claims that Best Buy gained market share during the fiscal third quarter (which seems to be a pretty dubious bragging point when sales rose by a mere 2% -- unless the world inexplicably bought less than 2% more worth of consumer electronics than it did a year earlier).

Best Buy is holding up these days, but that's never been the point.

No one says that Best Buy is dead. Folks just realize that Best Buy is dying.

"Best Buy is living in the corporate equivalent of what psychologists call a state of denial," Downes concludes in his sharp critique. "In business, that's usually the first step in a failure that ends with a spectacular collapse."

Open mic night is a disasterBest Buy has guts for letting folks post public comments on Dunn's blog entry. Maybe it didn't foresee the damaging reader opinions that would follow. Most of the more than 100 comments that have piled in during the weekend are brutal.

The first batch came from employees who are tired of having to hard sell product warranties, Best Buy card applications, Geek Squad tech support memberships, and the ridiculous buyback protection program whenever someone is ready to buy. This was followed by consumers -- and former shoppers -- who have grown frustrated in seeing the arguably knowledgeable staff transformed into an army of shills for up-sell programs that they don't need.

Didn't Best Buy realize that one of the reasons Circuit City folded three years ago was because of its overly aggressive sales floor? Folks hated it when RadioShack(NYSE: RSH) used to ask for their phone numbers, and that was solely for marketing purposes. These add-on services may be incremental offerings carrying chunky margins for Best Buy, but consumers are also smart enough to realize that the flipside of that equation is that they are out more money ordering losing propositions.

The Internet is cheap, always open, and it's just not as creepy as Best Buy has become.

Closing on a positive noteBest Buy is doing a few things right. Following GameStop(NYSE: GME) into buying back and eventually reselling used media and gadgetry is smart, at least until digital distribution renders both GameStop and Best Buy moot. Opening up smaller Best Buy Mobile kiosks -- ripping a page out of the RadioShack playbook -- is a strategy that will at least buy it some time.

However, there will come a point where the costs involved in running a brick-and-mortar operation can never match the dot-coms that do it for less. This isn't just about the state sales tax issue, which will also become irrelevant in the coming years. As time goes by -- and connectivity grows -- the number of people paying a premium for instant gratification (i.e., Best Buy shoppers) will diminish.

There are ways around this. Conn's(Nasdaq: CONN) was one of the few stocks to more than double last year, emphasizing furniture, appliances, and even lawncare gear that are tough sells in cyberspace. However, even that model will one day grow obsolete.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Author

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time with more than 20,000 bylines over those 22 years. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he splits his time living in Miami, Florida and Celebration, Florida.
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